SEC Inspector General Kotz Quits For Private Investigation Firm

Jan. 18 (Bloomberg) -- U.S. Securities and Exchange
Commission Inspector General H. David Kotz, whose aggressive
style was praised by lawmakers and criticized by current and
former agency officials, quit to join a private investigations
firm.

During his four-year tenure, Kotz oversaw probes into the
agency’s failure to catch Bernard Madoff’s multibillion dollar
Ponzi scheme, its lax supervision of Bear Stearns Cos. and the
pornography-viewing habits of some employees. He will stay
through the end of January before becoming a managing director
at Gryphon Strategies in Washington, the SEC said yesterday.

The resignation followed public criticism of Kotz by SEC
employees and alumni who said his investigations often lacked
evidence of wrongdoing and unfairly damaged some workers’
reputations. Kotz also came under scrutiny for giving an
extensive interview to the host of a paid radio show who posted
it on a website and uses it in marketing financial services.

Kotz “has served the agency with great distinction,” SEC
Chairman Mary Schapiro said in a statement yesterday.

“His work helped us to identify areas where we needed to
improve the way we operate, bolster our resources, and upgrade
our technology,” she said.

In a statement, Kotz didn’t give a reason for his
departure. He didn’t respond to an e-mail from Bloomberg News
seeking further comment.

‘Significantly Improved’

“I am tremendously proud of the accomplishments of my
office and the agency over the past four years,” Kotz said in
the statement. “While I will miss doing this important work, I
am gratified knowing that nearly every aspect of the SEC has
been significantly improved in the four years since I was named
inspector general.”

According to three people familiar with the matter, agency
officials didn’t know Kotz was planning to make an announcement
yesterday. As a result, the people said, there has been no
discussion about a replacement.

Kotz’s supporters on Capitol Hill, who have praised him as
a tough in-house cop who wasn’t afraid to take the agency to
task, urged the SEC to hire someone with a similar zealous
streak.

“David Kotz produced strong, conclusive reports, even as
critics claimed he was too aggressive,” Senator Charles
Grassley, an Iowa Republican, said in a statement. “The SEC
leaders would be smart to value those qualities and search
carefully for candidates who won’t pull punches.”

General Counsel

Kotz’s decision last year to refer former SEC General
Counsel David Becker to federal prosecutors for possible
criminal ethics violations over his inheritance of family
investment profits from Madoff helped spark a backlash against
the inspector.

Becker, who worked on an SEC policy related to reimbursing
Madoff victims after getting approval from the agency’s ethics
counsel, was cleared by the Justice Department in November.

Kotz, according to his reports to Congress, has referred
about 30 cases he’s probed to the Justice Department. Those led
to two prosecutions, one agreement not to bring charges and one
conviction as of September 2011.

Former SEC Chairman Harvey Pitt, in a September e-mail to
securities lawyers obtained by Bloomberg News, wrote that Kotz
had created “a reign of terror” at the agency. Pitt has
represented several people involved in Kotz’s investigations.

Pitt, who participated in the e-mail exchange about Kotz
with about 90 other securities lawyers, said the inspector
general’s activities put the agency on edge.

“People are afraid to write anything down, make decisions
or even take notes of telephone conversations, because the
current IG monitors everyone’s e-mails, including the
chairman’s, and starts investigations at the drop of a hat,” he
wrote.

‘Crash-Proof’

Kotz’s contacts with Phillip Cannella III, a Philadelphia-area financial adviser who markets a “crash-proof” retirement
plan, also have come under review. In late July, Kotz gave
Cannella a 75-minute interview at the agency’s Washington
headquarters.

After receiving queries from SEC officials about the
interview, Kotz asked a council of inspectors general to look
into whether he said or did anything improper, according to
people with direct knowledge of the matter, who spoke on
condition of anonymity because the matter isn’t public.

The SEC has asked Cannella to remove the video clips from
his website, saying their use could imply that Kotz or the
agency endorsed his business. Cannella has refused.

Club-Level Tickets

Last month Kotz confirmed to Bloomberg News that after the
interview Cannella got him three club-level tickets for a sold-out football game between the Philadelphia Eagles and New York
Giants. The inspector general reimbursed Cannella $95 per
ticket, though the Eagles valued them at $240 each.

“All my actions related to Phil Cannella’s radio program
were completely vetted and cleared by the SEC ethics counsel,”
Kotz said in an e-mailed statement to Bloomberg News in
December. “None of my actions were inappropriate or improper
and no one at the SEC has ever indicated to me otherwise.”

Kotz asked for the tickets in a Sept. 2 e-mail sent from
his SEC account to executives at Cannella’s firm.

“Now that football season is upon us, I wanted to let you
know that I spoke with our ethics office who advised me that I
was authorized to accept the football tickets as long as I paid
the face value,” Kotz wrote, adding that his children “are
very excited.”